The limited liability company or LLC is a popular business structure for many start-ups and small businesses due to its flexibility, ease of creation, and reasonable costs. However, business owners can enhance LLCs’ safeguards by taking various steps to maximize protection from lawsuits. An Arizona business lawyer at Provident Law® can advise you on the best strategies to protect your LLC from lawsuits. Here are seven potential affirmative actions that you can take to shield your LLC more effectively.
1. How Should I Handle My LLC’s Finances to Provide Additional Protection Against Personal Liability?
While an LLC protects against personal liability, it is not absolute. For instance, plaintiffs in lawsuits can attempt to hold LLC members personally responsible for an LLC’s actions or debts if the LLC has mixed personal and business assets.
Therefore, members should keep detailed and separate records for personal and business finances and never commingle personal funds or assets with business funds or assets. Keeping these funds and assets separate also makes tracking your business’s health easier.
2. How Does an Operating Agreement Enhance Protection from Lawsuits?
LLCs also should have an Operating Agreement that clearly outlines the members’ rights and responsibilities, how the business will be operated and managed, and how major decisions will be made. This agreement should address how to handle disputes among the members and what happens in the event of one or more members’ retirement, death, or departure. By having a comprehensive Operating Agreement in place, businesses can avoid many disputes between members that lead to lawsuits.
An Operating Agreement can also contain specific provisions that offer more protection for your LLC assets. For instance, some provisions may restrict the ability of members to transfer their interests in the business. The Operating Agreement should explicitly limit each member’s liability and require the members to maintain a certain minimum level of insurance coverage.
3. Must an LLC Observe Formalities in Running the Business?
While an LLC requires a much lower degree of formality than a corporation, operating an LLC still requires observing and maintaining some business structure under Arizona law. Therefore, at a bare minimum, an LLC member should maintain the statutory requirements for creating and maintaining an LLC under state law.
4. Should I Have Liability Insurance for My LLC?
An LLC, or any business structure, is never a substitute for liability insurance, which helps protect your business against unexpected events. Different types of insurance may be necessary to protect your business. For instance, you may need general liability insurance, property insurance to cover accidents at your place of business, and professional liability insurance, depending on your type of business.
5. How Do I Distinguish Between My Single-Owner LLC and My Personal Financial Dealings?
You should not treat your LLC as an extension of your personal finances. Aside from keeping your finances separate, it would help if you always made it clear to other parties when you are acting on behalf of the LLC and when you are acting on your own behalf. To that end, you should use your signature when dealing with personal matters and the LLC signature and your company title when transacting on behalf of the business.
6. What if I Must Personally Guarantee a Loan to Start My Business?
Many individuals who start a business must put in their personal funds to cover start-up costs. A fledgling business is also unlikely to get a significant amount of credit, so when you need a business loan, you may need to personally guarantee the loan using your personal collateral, such as your vehicle or home. When you provide a personal guarantee for a loan, you are personally responsible if your business defaults on the loan and your assets are not protected from the lender in the event of a default.
As a result, if you must initially personally guarantee a loan, you should pay off and/or refinance that loan solely in the name of the LLC as quickly as possible. The sooner you remove your personal guaranty from the business liabilities, the more secure your personal assets will be.
You also can avoid having to personally guarantee loans for your business in the future if you work on building credit for your business as quickly as possible. By paying your bills in full and on time and keeping clear records of your business profits and losses, you can pay off personally guaranteed loans sooner and avoid the necessity of personally guaranteed loans.
7. Don’t Save Excess Profits
As your business generates profits, you should not leave that profit easily available for creditors if you are sued. If you have profits, distribute them according to the terms of your Operating Agreement, reinvest the funds into the business to purchase additional equipment or supplies, or use them to hire more personnel as needed.
Contact Us for Assistance with Your Business Law Issue Today
The business lawyers of Provident Law® have over 250 years of combined legal experience representing business clients in various legal matters. We aim to build a long-term relationship with you as we work together to address and solve your most complex legal problems proactively. Contact a business lawyer today by calling (480) 388-3343 or reach out to us online to schedule a time to see what we can do for you.